Heads of terms are used in commercial property transactions to set out the key terms expected to form part of the deal.
Heads of terms help identify any issues which could prevent the success of the transaction as well as providing a guide for the lawyers when the formal, legally binding documents are prepared.
While not legally binding, the key benefit of a well-drafted heads of terms document is to provide clarity and certainty for all parties prior to negotiations starting. However, they should act as an accurate reflection of the terms which have been agreed by the parties to the transaction.
What to include in Heads of Terms:
Heads of Terms should cover all the key terms which have been agreed on by the parties in commercial property agreements. Core elements of Heads of Terms include:
- A detailed description of the land or property, including relevant plans and drawings.
- The details of the all parties involved in the transaction. This should include contact details and the key information of the business or charity. If a guarantor is being used their details must also be included.
- The responsibilities of each party, such as payment of costs and meeting deadlines.
- The agreed price or rent, if the latter including the amount and frequency.
- Conditions on which the transaction depends, such as planning consent or board approval.
- Any restrictions on the use of the property as well as any rights, for example having right of way or parking, which may be granted or reserved.
- They are in most cases identified as being ‘subject to contract’ within the document.
In the case of commercial leases for example, additional elements should include:
- Duration of the lease
- Security of tenure should be determined and whether the Landlord and Tenant Act 1954 will apply to the agreement
- Details of any break clauses or rent-free periods, as well as the process for rent reviews, should feature in the heads of terms
- Each parties’ responsibilities regarding repairs to the property and insuring of the property.
This is far from an exhaustive list, with each Heads of Terms relating to the unique transaction. Given that Heads of Terms are fundamental to negotiations and the subsequent drafting of the transactional legal documentation, take legal advice to ensure your Head of terms are well-drafted and reflective of all parties’ expectations.
Can the Heads of Terms be changed?
The purpose of Heads of Terms is to set out the key points of a commercial property transaction prior to creating the binding legal documents.
This means it is common for Heads of Terms to be altered by either or both parties as negotiations progress.
It is important that all changes to Heads of Terms agreements are tracked and recorded both to support further negotiations and to ensure changes are picked up in the final document.
Benefits of Heads of Terms:
Heads of terms are an excellent way to draft a transaction agreement for commercial property sale or lease. If offers both parties an opportunity to clearly set out their requirements for the deal to go ahead and understand the needs of the other party. Heads of terms can identify any areas of contention in an agreement before investing in legal documentation, after which changes can become costly.
Another use of the Heads of Terms is as a reference for the subsequent legal document. It is important that when both parties receive the “agreed” documentation, a legally binding document, they check that all the terms reflect those agreed in the Heads of Terms. Given that legal documentation is often complex, having the Heads of Terms as a template to compare the contract with is an important tool in ensuring your rights and requests are protected. This is another reason why Heads of Terms should be carefully written, the more detailed and thorough your Heads of Terms, the more confident you can be in the legal documentation.
Risks when using Heads of Terms:
Although Heads of Terms should not be considered legally binding, there have been rare cases where Heads of Terms have been seen as a contract, and so legally binding, by the courts. Stating clearly “subject to contract” on the document should demonstrate that the agreement is not a legal contract. However, under the Law of Property (Miscellaneous Provisions) Act 1989, it could be argued that any terms which are in writing and signed by all parties demonstrate the terms agreed by all parties, thus creating legal obligations.
Heads of Terms are not usually considered a legally-binding document. However, there have been disputes where Heads of Terms have been taken as proof of a party’s intention concerning the agreement. In some cases, Heads of Terms have formed part of the case for successful rectification claims.
Given that Heads of Terms can – in some instances – be used as legally binding document, and that they form the draft on which a legal document will be created, they must be carefully written. There are a number of terms which may seem innocuous to the inexperienced buyer, seller, landlord or leaser, that in actual fact have serious repercussions later on. Examples include writing in a provision that the seller receives a share in any future development value of the property or, in the case of a commercial lease agreement, removing any protection of the Landlord and Tenant Act 1954. All parties should be wary of submitting Heads of Terms agreements for legal documentation unless they are fully confident of what each term means and how it will affect the transaction.
Another source of complication is when the Heads of Terms fail to accurately and precisely reflect the key terms. This can lead to complications when the lawyers do create a legal document, incurring additional legal costs and delays when changes need to be made. Alternatively, if not spotted early on, ambiguity in the legal documentation can undermine the rights of either party should a dispute arise later on.
These are just a few examples of how Heads of Terms can be utilised in the courts to undermine a parties’ position in regard to a commercial property transaction.
Why seek legal advice:
If used correctly and carefully, Heads of Terms should provide a clear template for legal documentation. They should help to identify the key terms for each party and help move along negotiations, without incurring large legal costs. If well managed, Heads of Terms can support the rights of each party and ensure a clear and mutually beneficial commercial contract. However, there are a number of pitfalls which both parties should be concerned with. To ensure that the Heads of Terms effectively support a beneficial transaction, both parties would benefit from seeking legal advice from the start.